AT&T Rides Growth in Wireless — Deal for BellSouth Also Helps 2Q Profits Rise 61%

By Michelle Roberts Associated Press

SAN ANTONIO – AT&T Inc.’s earnings jumped 61 percent in the second quarter, driven mostly by its acquisition of BellSouth Corp. but also boosted by new wireless subscribers and better sales to large business customers.

The nation’s largest provider of broadband Internet and land and wireless phone services said Tuesday that 146,000 subscribers activated iPhones in the first 30 hours of sales as the quarter closed – news that seemed to disappoint Apple Inc. investors a day ahead of that company’s earnings release. The iPhone, which combines phone, media player and Web-surfing capabilities can only be used on AT&T’s network as part of an exclusive deal between the companies.

For the quarter that ended June 30, AT&T said net income rose to $2.9 billion, or 47 cents per share, from $1.81 billion, or 46 cents per share in the prior year’s quarter. Wireless subscribers rose by 1.5 million to 63.7 million, AT&T said.

A tiny part of that growth was driven by the iPhone , with more than 40 percent of the early iPhone activations done by new AT&T subscribers. July sales remain strong, the company said.

IPhone buyers sign two-year contracts, have higher-than-average rate plans and will likely continue to boost demand for wireless data services, an area that grew vigorously in the quarter, said CFO Rick Lindner .

AT&T shares closed down Tuesday 35 cents to $39.68 on a day of up and down trading. Apple shares dropped $8.81, or 6 percent, to $134.89.

Lindner noted that AT&T’s numbers represented activation rates, which are different from the number of units sold.

Analysts, too, said any reaction of first-day sales of the iPhone were probably unfair.

“The activations might have been a little light, but I’m not necessarily sure you can read a lot into that,” said Christopher King, an analyst for Stifel Nicolaus & Co.

The quarter overall was in line with expectations, he said.

Excluding acquisition costs, AT&T had earnings of 70 cents, up from 58 cents per share for the same three months last year and above the 67 cents average estimate of analysts polled by Thomson Financial.

Revenue for the quarter was $29.5 billion, up from $15.8 billion in the year-earlier quarter.

Revenue growth continues to be driven by wireless data use for services like messaging, downloads and laptop connectivity. Revenue from that sector was up 67 percent for the quarter to $1.7 billion, a trend Lindner said would continue .

Margins for the wireless business, however, were squeezed in the quarter as AT&T offered more discounts on higher-end phones in the fight to acquire customers willing to spend more on monthly plans and for premium services.

The wireless price war will likely get bloodier, said Zachary Research Investment analyst Patrick Comack, but he said AT&T had a very good quarter.

The company, which has grown aggressively by acquisition over the past several years, said cost savings from the integration of BellSouth reached $1.9 billion in the first six months of the year. The savings should hit $3 billion by year’s end and $5 billion by the end of 2008.

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